Is Land a Good Investment? A Reality Check on the Profits and Risks

Buying a home may be the American dream, but buying land—empty, yet full of possibilities—holds an almost mythical appeal. It’s also cheap: On average, land will cost you a mere $3,020 per acre. Unlike avocados or iPhones, land is a finite resource, which you’d think would shore up its value. So let’s talk turkey: Is land truly a good investment?

The answer depends, for starters, on what you hope to do with it. The possibilities, of course, are close to endless: You could build a cute little cabin or your dream mansion. Or maybe you’re thinking big with your investment, like a future condo complex or shopping mall that will reel in beaucoup bucks.

But while land may seem as solid as an investment gets, it’s not something you want to venture into without careful consideration of the costs and red tape you’ll encounter. Here are some of the questions to ponder to help you decide whether you want to forge ahead.

How can the land be used?

Investors must consider not only the value of the land itself—in terms of its location and price—but also its intended purpose, says Eric Malmberg, a broker with Re/Max Advantage Plus in Minneapolis–St. Paul, who specializes in land sales. As such, your first step should be to check with the city or county to see if the land is zoned as residential (homes), commercial (shopping malls), industrial (manufacturing), or agricultural (farming). Similar to zoning laws, land can have specific designations—say, a historical site or preserve—that limit what you can build on it.

Whatever a land’s label, you should take it seriously, because if you build a house on a commercial lot, a shop on agricultural land, or some other mismatched arrangement, you’re breaking the law. And that’s rarely a winning strategy for investments (just look at where Bernie Madoff ended up).

Can land be rezoned?

What if the land you’re eyeing is not zoned the way you were hoping? Many an investor has plowed ahead anyway, intending to maximize an investment through rezoning, a phenomenon known among investors as “future-use payday.” For instance, maybe land that’s classified as agriculture currently has a restriction that will be lifted and reallocated for condos once the local population density reaches a certain level, handing a windfall to any landowner savvy enough to see it coming.

But buyer beware, cautions Andy Prasky, who specializes in new construction and land development with Re/Max Advantage Plus in Minneapolis–St. Paul.

“Investors with rezoning dreams are usually at the mercy of the city staff,” says Prasky. “They will likely find the process to be full of costly surprises, such as land surveys, engineering reports, wetland delineations, watershed compliance, feasibility reports, and more.”

In short, waiting for rezoning to happen is high-risk, high-reward. If you aren’t an experienced real estate investor or a high roller, you should probably look to other options (read on).

Can I make money off the land immediately?

Keep in mind that land comes with carrying costs: You’ll have to pay taxes on it, for instance. As such, to keep your land from being a constant drain on your finances, you’ll want to find a way for it to generate income immediately. This can be done by planting crops or trees on it, leasing it out for cattle, or offering up hunting rights.

“The key to holding raw land is to keep the taxes and expenses under control,” Prasky says, adding that agricultural land has the lowest taxes. In Minnesota where Prasky lives, for instance, farmland sells for between $8,000 and $16,000 an acre. Rent it out to a farmer, and the crop yields will generally reap a return on investment of about 3.75% per year. In short, farmland is akin to a blue chip stock: It won’t make you rich, but it does offer a slow but steady return.

What do developers think?

But if your dreams are to build something on your land, one professional you may want to call for advice is a developer. As a rookie investor, you may be valuing attributes that a homeowner would look for, like natural beauty, views, and proximity to amenities. And while these factors are important, a developer will eye additional details such as the number of buildable acres (which may not be all of it), expected expenses for site improvement, and ease of getting permits and approvals.

Also keep in mind that building will cost you, a lot. According to data from the National Association of Home Builders, the median cost of building a home is $289,415—that’s more than it costs to buy an existing median-price home, at $223,000. And that’s not where your building expenses end. You’ll also have to pay for surveys, permits, and health department approvals. What’s more, the site must be cleared, graded, and excavated—all of which can take a year or more to complete.

Bottom line: Land, as an investment, may be more trouble than it’s worth. So if you’re looking for fast and easy returns, stocks or regular real estate may be better bets. Still, if land ownership holds some appeal, just make sure to do your homework … and maybe grow a few soybeans to make ends meet.

The post Is Land a Good Investment? A Reality Check on the Profits and Risks appeared first on Real Estate News & Advice | realtor.com®.